Monday, August 27, 2012

Marikana as a microcosm.

How the tragedy reflects many serious socio-economic issues of our time.

It could have become one of the longest reports ever written. If the Commission of Enquiry into the Marikana massacre goes beyond its terms of reference and covers all of the nuances and underlying factors that went into the making of a tragedy on that outcrop at Lonmin’s platinum mine near Rustenburg, it will become a voluminous litany of socio-economic dysfunction.

One already has a taste of this not only from the widespread headline coverage that has saturated local and international media, but from the very disparate sources of comment and analysis – religious, political, legal, social and business. They all bear valid testimony to the very wide ranging issues involved. Well, not all. Emotion can sometimes produce some strange perspectives – like questioning platinum’s “noble metal” status in exploiting labour to “adorn elitist ring fingers” and for catalytic converters in “luxury yupmobiles”.

It is a hopeless and futile task to try and cover all of the key issues in a column like this and to avoid repetition. So it is not without some hesitancy that I become one of those bees whose swarm has been disturbed by the gunfire and who buzz in an already overflowing space of comment. But somehow I can’t help seeing in those excessively repeated video scenes, a severe indictment of a global economic state that is clearly in crisis and of voices that were not heard by the powers that were supposed to have served them.

In one of his first interviews after his ground-breaking Labour reforms, Nic Wiehahn told me: “If you have one worker who can bring your operations to a standstill, you had better talk to him.” He saw collective bargaining as an essential counter to industrial chaos and uncontrolled mobs of frustrated workers sabotaging their workplaces. He also saw union rights for all as at least one form of enfranchising the politically disenfranchised at the time and something of a safety valve for frustrated political expression. That automatically created a disproportionate bond between worker and political aspirations, the results of which are still evident today.

Power has an intrinsic anomaly – the more you centralise it, the more powerful and corruptible it becomes and the more it loses touch with its support base. What you are often left with is an elitist and aloof leadership and fragmented support consisting of many “minorities of one or a few.” In labour, that not only encourages competitive unions, which in itself is not a bad thing, but more frighteningly can lead to marginalised groups that become unruly mobs. While Marikana has been blamed mostly on union rivalry, the rivalry itself had to find some root in a disgruntled group. If this spreads to other workplaces, we could be in for a further and severe deterioration of industrial relations.

There clearly is also a gulf between leaders and supporters in centralised political power in South Africa. The three tier government structure is overwhelmingly dominated by the dictates of national parties. Recruiting support for their power bases both in government and labour produces a highly dangerous toxic mix of unrealistic expectations that fuel explosive situations of which there have been many since 1994.

Although formed and manifest differently, greater centralisation of economic power has created a similar alienation. Increasingly large corporate institutions, holding companies and big business have contributed to a growing public perception of a dehumanised business environment driven virtually exclusively for profit and viewing all involved, including customers, as resources to be exploited in squeezing out each drop to enhance shareholder value. It certainly has exacerbated income disparities and in the public eye at least, given these institutions undue influence over government and impact on their daily lives.

Mining has brought significant economic benefits to this country. Indeed overall, labour and government as a group have been bigger monetary beneficiaries than shareholders as a group. But no-where is business more dehumanised than in mining. In most other businesses at least, there is some sense of meaning beyond profit and pay – that of service to customers. Mining is not market driven, but market led or pulled. There is no sense of customers and service. No-one who has not worked underground for more than a brief spell, will fully understand the psyche of an underground worker. It is like going into battle, sometimes for up to 10-hours on rotating shifts, often crawling through narrow spaces to reach a dangerous claustrophobic area at the face, where the rock drillers have to struggle with heavy vibrating machines for hours on end.

It’s an environment that breeds tough, macho men for whom working close to death or injury daily intensifies frustrations and fortifies them for violent confrontations elsewhere and who, apart from a desperately needed pay cheque, hold it together underground through a palpable sense of soldierly camaraderie. In these conditions, you simply cannot explain huge pay disparities and a stipend (even at more than R8000 pm gross) that in most cases has to feed a much extended family – a burden that keeps on growing with rising unemployment. It’s a highly emotional context that will always overwhelm any rational academic argument based on supply and demand for skills and qualifications. Living conditions are often not much better, despite efforts by the industry generally to improve them. All of this has been born out of an unfortunate colonial history of real wage slavery, migrant labour, compounds, hostels, and frequent deaths and injuries underground. Remnants of those conditions still remain.

What’s highly incongruous is why any group of strikers find it necessary or are allowed to be armed to the teeth with lethal weapons. There was a time when faction fighting was a regular occurrence, and weapons were fashioned from any suitable object that could be found – spears shaped from heavy tempered-steel rock drills, spikes, choppers, axes, pangas, knobkerries, shanks and knives.

Many of these were brandished on that now infamous koppie at Marikana. If I had a machine gun and they came storming at me from the hill, I doubt whether I could have resisted the urge to open fire.

But then I am not a policeman trained – or at least who should be trained – to handle these things.

Tuesday, August 21, 2012

Misery has its merits.

Will societies emerge from economic hardships happier and stronger?

“Only when the tide goes out do you discover who's been swimming naked” is a memorable and still classic quote from billionaire investor, Warren Buffett. Its wisdom is rooted in a long held insight that like the seasons of nature, economic cycles are a healthy and necessary thing.

Not unexpectedly, the cyclical nature of economics is again receiving some attention in the current global slump. Early 20th century Russian Economist, Nikolai Kondratieff defined “super-cycles” as being 50 to 60 year waves broadly based on periods of innovation and implementation. Cycles have received much attention in authoritative research and economic theory, with one of the best known being Joseph Schumpeter who dissected Kondratieff’s wave into four main cycles.

Downturns not only reveal who has been swimming naked, or which businesses are flaky and unsound, but those that do survive are affirmed as being viable and most likely sustainable. Even those who did not make it will have learned valuable lessons to apply in a next attempt or venture. This applies as much to individuals, societies and countries as it does to business. Will Greece or Spain ultimately emerge stronger from their current woes? Will Europe likewise be stronger and more cohesive? Or even if the Eurozone falls apart, will it be to the ultimate benefit of those departing and those remaining?

One cannot help wondering whether the current global economic slowdown, with its extended stop-start nature, and business confidence here in South Africa falling to a 12 year low are not reflections of a much deeper adjustment process that will change many conventional insights about economics itself.

It’s been a long while since I last adorned my ill-fitting guru gown and then despatched it in pieces to the bin reserved for car cleaning rags. But one does not have to be a futurist or highly paid scenario planner to sense intuitively that there are major economic shifts happening beneath our feet. It may eventually manifest itself in a completely new economic model which, as the Wall Street Journal reported some time back, has been the subject of some serious study involving a number of different disciplines. Even some countries, like Malaysia’s growth focussed approach and Bhutan’s Life Satisfaction focus, are reflecting a desire to experiment with different ideas that could contribute to a melting pot delivering a model that breaks from traditional ideological paradigms.

But the toying with ambitious new models is not the only reflection of the shift. It is more clearly discernible in tangible events that undoubtedly will leave the world a different place in the next few decades, albeit mostly structural. An obvious one is the rapid growth in government involvement in economies which up to know have been defined primarily as being Capitalist or Free Market. In many, including the United States, government’s share of Gross Domestic product has reached a post war high.

Mixed economies are with us, whether ideologically correct or not. And there’s little likelihood that government involvement will be rolled back when the global economy returns to growth. In future, assessing the health of economies will have to be based to a much larger extent on the behaviour of the government. Measurements such as GDP will increasingly lose their efficacy as assessors realise the importance of other criteria such government debt, productivity, accountability and effectiveness.

Another slow but inexorable development has been the growth of international government. The impact of international rules covering key areas such as labour, trade, environmental protection and financial controls are being felt on an ever increasing scale. Environmental considerations themselves will inevitably in time reflect important structural shifts in a number of areas, particularly in industry and manufacturing.

Companies are feeling the winds of change too. They may appear to be responding very reluctantly and slowly as evidenced by repeated misconduct based on greed, short-term profit maximisation and obsession with shareholder value, but public disapproval has been mounting and has become more tangible in protests, media attention, and rules and regulations covering business conduct, governance, transparency and sustainability.

Financial systems are already being overhauled and have been since they were primarily blamed for the crash in 2007. New rules governing banking and regulation of financial markets are being written regularly, and will continue until misconduct such as the recent Barclays Bank LIBOR fiddling is finally a thing of the past.

The fact that financial manipulation of that magnitude could still occur five years after the players in those sectors were identified as the main perpetrators of the financial calamity reflects a much deeper underlying malaise – an inability to confront the strong likelihood that the entire global financial and monetary system needs a major overhaul. Thus far, governments and regulators have bent over backwards to preserve the vestiges of a system that let it down in the first place. In the process they have shifted mountains of debt to individual taxpayers, moving the burden to ordinary workers and citizens and not flushing out the speculative froth that made a select few inordinately rich in the three or so decades to the mid-2000.

All that this means is that the real much needed transformation -- that of individual behaviour -- will be very slow and most likely incapable of coping with the regularly postponed but inevitable day of reckoning. The very things that slumps, downturns, depression and deprivation were supposed to have taught us will be absent.

There’s only so much an individual can do to cope materially. It has to go much further than having an emergency fund, savings or life insurance. That day will require people who are independent and self-reliant. They will need to be innovative, prepared to take risks, aspirational and expecting little in the full realisation that they are not in control of anything but themselves and their own responses. Prudence, patience and flexibility will be key attributes to survival.

I’m left wondering how we as South Africans will cope.

Monday, August 13, 2012

Using taxes for Employee share schemes.

Questioning the wisdom of giving tax breaks on Employee Share Options.

Sometimes politics can generate some curious suggestions. Despite its likely overall merits, the Democratic Alliance’s master plan to increase employment includes a proposal “to introduce tax breaks to help ordinary South Africans get shares in the companies they work for.” It is a bit like dishing up a wholesome plate of pasta with a spoonful of peanut butter on top of the serving.

Employee share options really do sound like a great-to-have – employees owning a stake in the company and working their tails off to ensure top dividends. But unless the ESOP is designed for employee control of or a significant say in the company, the merits of conventional programs have still not been clearly demonstrated globally. As I wrote in an article last year: they have “as many champions as detractors. The accounting conventions are still not fully understood, polished or even universally supported.” As a concept in organisational theory it certainly deserves on-going scrutiny. But to take it to a point where we should consider sacrificing part of our tax income in its wider promotion is putting the cart very far in front of the horse. In the United States, there have been some serious efforts to roll back tax breaks for ESOPs

One of the puzzling contradictions in the DA proposal is that it is clearly going to be of benefit mainly to employees (or more likely employers) of listed companies. It is then proposed to have “an employee bonus scheme for unlisted firms that replicate existing share incentive regimes for listed entities”. It suggests that “bonuses would be partially tax-free, in a ratio that is linked to growth in an appropriate share index over the five-year period”. Apart from a rather nebulous measure, it still means that the tax break will in practice only apply to larger companies, putting smaller and medium enterprises at an employee recruitment disadvantage.

Employee Share Option Schemes have been around for some time. But it has only been since the mid-seventies that wooing labour into the shareholder camp has gained momentum and has given rise to a whole array of schemes with some of the most complex, costly and imaginative forms of accounting targeted at the whole spectrum of employees from executives to the general workforce.

Despite their growing popularity in employee reward systems, particularly executive rewards, they have had inconsistent outcomes at best and apart from some anecdotal research I have not been able to find credible scientific global evidence to prove any real discernible difference in staff motivation, loyalty and productivity, between those that have and do not have them. While it has been argued that they tend to work better at a more senior level in an organisation, a PWC study has concluded that they are deeply flawed even at that level. Recent history is also increasingly questioning the behaviour of many executives in exploiting short term performance at the expense of longer term company health to gain maximum benefit from their options. Do we really want to add general staff into that collusion?

What is already clear from both the number of collapses of these schemes and the overwhelming number of participants who cash in their shares at the first opportunity, is that the schemes themselves seldom enjoy much loyalty. Of course, most employees will express willingness to be part of such a scheme, especially if they have heard about Kumba employees getting up to nearly R600 000 in share option pay-outs. But even here, given the opportunity to reinvest, less than 20 of the more than 6200 did so. Loyalty to an ESOP will be severely tested, and probably fail, if it hints in any way at flexibility in regular pay.

Minority holding ESOPs may eventually prove their value, but at this point their rationale is suspect. Their growth is rooted in the agency theory which seeks to align the interests of managers with the interests of owners. This became popular organisational thinking in the past 3 decades or so with the emphasis on shareholder value. Unfortunately, there has also been a coincidence of customer neglect over this period, leading to the question whether the pursuit of shareholder value itself is not to blame for a growing gap between shareholder and customer interests.

If the primary purpose of ESOPs is to encourage employee involvement in their companies and pave the way for flexible pay structures, then there are far easier and more effective ways of achieving this than through complex share ownership schemes. It is difficult at the best of times in any collective to align a common interest around rewards. It is especially so in companies where we simply cannot get away from the inherent conflict between profits and pay in the way our accounting formats are structured. And it is even more difficult in a confrontational labour environment such as in South Africa, despite its BEE benefits.

A common, unifying purpose is still best achieved through a focus on what everyone is there to contribute – service to others. Not only is this the only way of ensuring improved rewards for all, but it is the foundation of competitiveness, which in turn creates jobs and attracts capital. Once common purpose is forged, it becomes a lot easier to introduce common fate instruments such as profit-, gain- or fortune sharing. Only then will an ESOP make sense.

Giving credit where credit is due, the DA plan comprehensively and imaginatively tackles the problem of income disparities at one of its key sources – that of executive pay. Page 54 of its document says: “measures to reduce inequality will also have to tackle high-powered corporate insiders who extract salaries that are often out of proportion to the shareholder value they create by abusing remuneration committees that are not independent and shareholders who are not sufficiently informed.”

But as far as employee share ownership is concerned, and if I were asked to sacrifice some of my tax Rands, I would much rather do it on ensuring that employees are willing, contented and productive workers before being shareholders.

So far, there has been no substantiated link between the two.

Monday, August 6, 2012

Dehumanising business.

Why society is increasingly at odds with its business institutions.

Picture this: The Absa stadium in Durban packed to capacity with more than 50 000 people. Outside, 50 000 more are waiting to get in. Listen to the crowd chirping and you discover that they were all Absa clients who, for some or other reason, had left the bank in the past year or so. Then imagine that after waiting under the glare of Absa stadium billboards for some bank executives to address them, the executives do not pitch.

No, these executives are not following up the more than 5000 comments on, which have an overwhelming number of “frownies” next to them. They are on their way to explain to shareholders why headline earnings are down 6%. But they do hold a placating card in the form of an increased dividend indirectly funded in a small part by covert retrenchments over the past year or two but mainly made affordable by capital levels above those of the other banks.

Of course, the above bit of fiction has been constructed somewhat out of context – one being that the stadium crowd still represents only a small percentage of the bank’s total client base. Branding experts maintain, however, that clients who have a bad experience will tell 12 others about it. A good experience is shared with only 3. With social media you could probably multiply those numbers many times.

But the dripping irony of my little story was based on some of the real bullets of

· clients lost,

· earnings down,

· dividends up,

· staff retrenched and

· uncomfortably high capital levels.

I find it difficult to connect these dots, but one is certainly left with a taste of an unbalanced mix between shareholder, employee and client focus. It was starkly underscored by the media coverage of Absa results which literally deluged us with shareholder information and I found only one, in Die Burger this week that covered client migration. In bygone days this would have been crucial shareholder information. In response the bank has launched “Values Bundles” in an attempt to woo back those phantoms in the Absa stadium. And even here, Finance Director David Hodnett found it necessary to caution shareholders that this “could further dent non-interest income” but with benefits in the longer term. It reflects the partly self-created quandary facing many executives today – investor pressure for quicker delivery. It’s a modern disease called short-termism.

In the meantime, it seems, holding company Barclays has had its own eureka moment after its Libor woes. According to The Telegraph the bank has now confessed that it needed a culture change that would see it “affirming key values” with “reinforcing mechanisms” to ensure staff behaved appropriately. Alluding to management and pay, it added “visible leadership” and rewards would have to be aligned to these values.

This is not about Absa, or even Barclays. I’ve never quite understood how the gap between shareholder and customer interests has been allowed to develop to a point where trust in business has dropped so low. Or how is it possible that despite all our economic woes and growing unemployment in most of the West, corporate earnings in the United States for example can be at 60-year highs?

It came to me after an interchange with a well-informed Moneyweb reader which again confirmed how deeply capital has been entrenched as an untouchable golden calf. This has been accompanied by two strongly held assumptions: that capital is a very scarce and precious resource and that profit represents wealth creation.

The second assumption: that profit equals wealth creation is simply an accounting fallacy. Value-added (sales less outside costs) is wealth creation as a result of adding value to people’s lives. Profit is only one part of that. While some argue that wealth creation is the result of profit creation, I’ve consistently challenged that view on the basis of volumes of research and the stated intent of a very large body of the best known entrepreneurs. These are the people who should be writing business theory and not economists, academics, accountants and consultants.

If profit maximisation automatically increases wealth creation it is mathematically implausible to have a slackening in GDP accompanying general above inflation increases in company earnings. Then the latter is only possible through squeezing out the share of other stakeholders such as labour, or impairing longer term customer service. In turn it increases the gap and conflict between the 1% and 99%. We could argue that lower growth has been caused by increasing government involvement in economies, but the nature of this involvement has been to act contra-cyclically; to soften the decline and prevent it from falling further. The real caveat here is that governments have done so largely through increasing debt. Only tangible value-adding and not debt can create sustainable prosperity.

The first assumption, that capital is a scarce resource, is a theoretical hypothesis that has really taken hold of corporate business since the 70’s. Its legitimacy is defended on the basis that axiomatically assuming its scarcity is the best way of ensuring maximum productivity and competitiveness. Of course that is partly true, but the assumption of real scarcity is questionable and there are many other ways of ensuring maximum productivity than by creating a lean, mean profit producing machine, which Bill Kellogg once described as “dreary and demeaning”. As for competitiveness, there are many examples of customer neglect due to profit maximisation, ultimately eroding competitiveness and leading to self-destruction.

In this context capital is defined as money applied in productive capacity or shareholder funds, the returns on which have to be competitive with other uses of money. Any scarcity has to be reflected in supply, demand and price and we do not need complex P.E. calculations to prove that entrepreneurship, innovation and stable companies, especially the larger institutions, have little difficulty in attracting capital. Just two indicators already show this: the relatively high level of corporate savings and the flow of money to stock markets where on the JSE alone we have seen regular record highs in the All Share index these past few weeks.

The real harm that the capital scarcity assumption has done has been to encourage short-term profit maximisation, to shorten performance horizons and aggravate social divisions. In the process it has created a golden calf based on a theory, a rule or an institution which has literally dehumanised a crucial body of people in wealth creation – investors who enable great people and great ideas to serve mankind.

Of course this fits in with a dehumanised view of economics itself – where transaction is not seen as people serving people within the rules of legitimate transaction and to the mutual benefit of both, but as supply exploiting demand; where customers are not seen as people who have needs, wants, expectations and aspirations that can be served by others in business, but rather as an exploitable entity known as “the market” and where labour is not seen as a partner in this service and in creating wealth, but as a commodity, costly bags of kilojoules that eat away at scarce and precious capital.

Ultimately society, whether misguided or not, will dictate what it expects from its institutions, including business. Conventional assumptions around business are being challenged regularly through social pressure and protests, and new rules and regulations such as governance, transparency, and ethics requirements.

It is such a pity when one has to slap restrictions on something which could and should be a benevolent process. But that’s what happens when you pay homage to a golden calf.